What is Asset ROI (RoFA)?
Asset Return on Investment (Asset ROI) or RoFA (Return on Fixed Assets) measures how much money the company makes in return for its assets.
There are two main KPIs to assess the returns from fixed assets: RoFA (Return on Fixed Assets) and FAT (Fixed Asset Turnover Ratio).
TL;DR
Asset Return on Investment (Asset ROI) is crucial for businesses as it measures the returns earned from their fixed assets.
Key Metrics: Two main metrics, RoFA (Return on Fixed Assets) and FAT (Fixed Asset Turnover Ratio), help assess ROI and asset efficiency.
RoFA Calculation: RoFA is calculated by dividing current operational income by investment cost, providing insights into profitability.
FAT Calculation: FAT measures asset utilization by dividing net sales by average fixed assets, indicating how well assets are being used.
How to calculate RoFA (Asset ROI)
RoFA = Current Operational Income / Investment Cost
Imagine a company sells $5 million worth of goods but has spent $20 million on machinery.
From the RoFA formula, we have:
RoFA = $5,000,000 / $20,000,000 = 0.25
But what does RoFA (Asset ROI) mean?
In practical terms, it means the company is getting $0.25 for every $1 spent. Therefore, it’s safe to say RoFA (Asset ROI) is a good indicator of both return on investment and profitability.
There isn’t a standard you should strive for when it comes to RoFA (Asset ROI).
For example, industries that are capital-intensive and require a huge amount of fixed assets have a lower RoFA (Asset ROI). However, their return on fixed assets should improve over time as income grows. More than trying to hit a standard, monitor the direction in which RoFA (Asset ROI) is going.
What is FAT or FATR?
FAT or FATR means Fixed Asset Turnover Ratio, and it measures how much the company uses its assets. To calculate FAT, divide net sales by the average fixed assets.
How to Calculate Fixed Asset Turnover (FAT):
FAT = Net Sales / Average Fixed Assets
Imagine a company sells $5 million worth of goods. In the beginning of the year, its assets’ beginning balance was $2m. In the end, it was $1.9m.
FAT = $5,000,000 / ($2,000,000 + $1,900,000) / 2 = $5,000,000 / $1,950,000 = 2.56
This means the company earns approximately $2.56 per $1 spent on assets.
Note that FAT is not an indicator of profitability or cash flow. What it shows is how well a company uses the assets it already has. A higher ratio means you’re using assets more effectively, but there isn’t a global benchmark.
How to Improve Return on Fixed Assets
The obvious way to get more return on fixed assets is to extend their useful life, and this is where maintenance really shines. If you manage to keep assets in optimal condition through routine maintenance, production never halts, machines last longer, and therefore you get more return on investment.
Plus, you’ll avoid excessive spending on emergency maintenance and losses due to disruptions and downtime.
Maintenance and Repairs Expense to Fixed Assets Ratio
If you’re thinking maintenance will eat a big portion of your budget, you should monitor the maintenance and repair expenses to fixed assets ratio. Here’s the formula:
Maintenance Repairs Expense on Fixed Asset Ratio =
Maintenance Repairs Expense / Total Fixed Assets
Where total fixed assets equals the cost of assets, and not their value after depreciation. If this ratio goes up, it means your fixed assets are becoming more expensive to upkeep. The lower the ratio, the better, and anything under 10% is very good. (Unless, of course, you’re not performing due maintenance – in which case you’ll also have a low fixed asset turnover ratio).
A high ratio means your fixed assets may be too worn out and not be worth the costs. So, like depreciation, it’s a good indicator of whether you need to replace a fixed asset or not.
